Corporate Inequality

The tax reform bill passed by the US Congress in December, which drastically lowered the corporate tax rate from 35 to 21 percent, has prompted numerous large employers to announce raises, bonuses, or upgrades to their benefits packages as a means of passing on some of their tax savings to their employees. On Wednesday, the restaurant chain Chipotle announced a round of one-time cash bonuses and stock grants, as well as increased parental leave coverage for many employees. On Thursday, CVS said that it would boost hourly employees’ pay from $9 to $11 per hour, among other pay rate increases, and now provide up to four weeks of paid parental leave for full-time employees. Walmart, Starbucks, Disney, Wells Fargo, and other large companies have made similar moves.

What remains unclear, however, is whether these rewards (most of which consist of one-time bonuses rather than permanent wage increases) are sustainable and whether the benefits of the tax cut will redound to the majority of Americans who don’t work for large corporations. Small business owners are reluctant to make similar moves, much as they would like to, until they have a better sense of how much money they will actually save from the tax reform. As the Associated Press’ Joyce Rosenberg pointed out this week, smaller companies have less clarity on that issue than large corporations do, and questions remain as to how new deduction rules will pan out for small business owners. In addition, small and mid-sized businesses have nowhere near the same cash reserves or credit lines as big companies do, which makes the awarding of bonuses and raises a much riskier endeavor.

Typical A.I. specialists, including both Ph.D.s fresh out of school and people with less education and just a few years of experience, can be paid from $300,000 to $500,000 a year or more in salary and company stock, according to nine people who work for major tech companies or have entertained job offers from them. All of them requested anonymity because they did not want to damage their professional prospects.

Well-known names in the A.I. field have received compensation in salary and shares in a company’s stock that total single- or double-digit millions over a four- or five-year period. And at some point they renew or negotiate a new contract, much like a professional athlete. … Salaries are spiraling so fast that some joke the tech industry needs a National Football League-style salary cap on A.I. specialists. “That would make things easier,” said Christopher Fernandez, one of Microsoft’s hiring managers. “A lot easier.”

The concentration of AI expertise in the hands of a few large, rich companies is a matter of concern because it runs the risk of shutting out not only smaller enterprises and startups, but also universities from hiring these cutting-edge technologists. If the academy is unable to compete for PhD holders in this field, that runs the risk of creating a shortage of professors to teach the next generation of AI specialists and conduct research in the public interest. Recognizing the transformative power of this technology, some tech leaders have talked about making AI innovations open and accessible rather than proprietary, while some AI experts are turning down industry jobs to work at universities or research institutes, but half-million-dollar salaries are hard to resist.

In the past year, we’ve taken a few looks at “corporate inequality”: i.e., the theory that income inequality in the US is being driven in large part by the growing divide between the compensation of high-value employees at highly profitable firms and the rest of the workforce. Large, wealthy organizations, particularly in the tech sector, are able to attract top talent by paying much higher salaries than lower-margin industries, exacerbating inequality by cultivating an elite class of professionals with high pay and lavish perks whose experience is completely divorced from that of the typical employee anywhere outside Silicon Valley or Wall Street.

The $500bn company has been conscientious about ensuring that its subcontracted workers are relatively well paid. In May 2015, amid a nationwide movement to raise the minimum wage, the company established a $15 an hour minimum for its contractors, as well as benefits like paid sick leave, vacation and a $4,000 new-child benefit.

But those wages only go so far in a region with out-of-control housing costs. San Francisco and San Jose ranked first and third in the nation a recent analysis of rents, with one-bedroom apartments in San Jose going for $2,378. The extreme cost of housing is why California has the highest poverty rate in the country, according to a US Census figure that takes into account a region’s cost of living.

Over the past year, we’ve looked at a few examples of a phenomenon that has been referred to as “corporate inequality”—referring to a significant and ostensibly widening gap between the profitability of high-performance firms with lots of cash on the one hand, and less productive, less wealthy companies on the other. This profitability gap naturally leads to another gap in the compensation, benefits, and perks these companies are able to afford for their employees, and according to one scholar’s theory, these differences are even a key contributor to income inequality and social stratification in the US today!

There’s another reason why these companies might have a head start in profiting from these new technologies, however. In a keynote address at last week’s Strata + Hadoop World conference in San Jose, California, Cloudera co-founder Mike Olson warned that because machine learning depends on access to enormous data sets, its main beneficiaries will be big companies that already own vast amounts of data and can already implement these technologies to scale, according to Matt Asay at TechRepublic:

Last year, Harvard Business Review senior associate editor Walter Frick identified “corporate inequality”—a widening gap between the profits of the most and least productive companies, and an ensuring disparity in how well these firms are able to compensate their employees and attract top talent—as a distinctive yet underappreciated feature of today’s business environment. It’s also an important problem, Frick argued, because corporate inequality contributes to income inequality and harms competition.

Earlier this month, Frick highlighted some new research showing finding that the pay gap between large and small firms has actually declined in recent decades, but the shrinking overall gap conceals growing inequality between highly skilled, highly paid employees and the rest:

Since the late 1980s, the gap between how well big and small firms pay has shrunk, according to a recent paper by J. Adam Cobb of the University of Pennsylvania and Ken-Hou Lin and Paige Gabriel of the University of Texas at Austin. But the gap hasn’t shrunk equally for everyone. Highly paid workers at big companies continue to make a bit more than their counterparts at smaller firms, and this gap hasn’t changed. The shift has been in the pay premium for their colleagues further down the pay scale. Mid- and low-wage workers at big companies still make more than their counterparts at small ones, but nowhere near as much more as they used to.

Artificial intelligence is poised to transform the way we work, both in ways we’ve long imagined, and in ways we can’t. Because AI and machine learning are emerging technologies, the talent that knows how to build and use them is currently in short supply. Compounding that problem, Cade Metz writes at Wired, is that large corporations with massive war chests are acquiring AI startups left and right, hiring up all the top talent and leaving none left for the little guy:

Not everyone can go out and grab thirty AI-happy astrophysicists. And if you can’t do that, the talent pool becomes very small very quickly, since these machine learning techniques are so new and so different from standard software development. Even the big players talk about the tiny talent pool: Microsoft research chief Peter Lee says the cost of acquiring a top AI researcher is comparable to the cost of acquiring an NFL quarterback.

At Bloomberg, Carolynn Look takes note of a new paper arguing that professional recruitment firms, by funneling top talent into high-performing (and high-paying) organizations, are exacerbating the gap in pay between top earners and the average employee:

The share that the top 1 percent of earners in the U.S. take from total wages has almost doubled since the 1970s, and Alexey Gorn, a researcher at Bocconi University in Milan, Italy, suggests it may have something to do with the simultaneous rise of professional recruitment firms. In a paper, presented at last week’s European Economic Association conference in Geneva he argues that at least 40 percent of top earners’ wage growth can be traced back to headhunters offering exclusive opportunities to high-skilled workers at the best firms — along with a paycheck that less-well trained people won’t ever see. …

To determine the impact headhunters might have on wage inequality, Gorn developed a model based on U.S. labor-market features in the 1970s and 2010s. According to his calculations, the introduction of headhunters leads to a significant shift of high-skilled personnel toward the most productive firms. Likewise, less-productive firms have lost top workers, and less-skilled laborers have forgone a shot at the best-paying jobs.

This idea is reminiscent of “corporate inequality,” the theory that income inequality is driven largely by how well different firms pay. While I understand the argument this paper is making, I wonder whether it’s accurate to identify professional recruiters as the cause of this phenomenon.